Under liquid market conditions, the fair value of these asset-backed products could be obtained from a broker quote, which would be based on that dayâs trading activity for a specific security. This has and always will be an accepted practice in active markets. However, in todayâs environment, a large number of these securities have not traded for several months, leading to stale broker quotes which are poor indications of current fair value.
To accommodate audit and internal risk compliance requirements for securities with no market observable prices, OTC Val is working with market participants to address their valuation and transparency requirements by employing model-based and fair value estimation techniques.
Despite the recent legislation submitted to Congress by the US Treasury Department to purchase up to $700 billion of troubled residential and commercial-related assets, pricing challenges will continue to hamper this market segment due to limited underlying data availability, information on particular structural parameters of an asset, and credit standing of the component pieces of the asset.
Bob Sangha, managing director at OTC Val, adds "In an inactive market, we believe that market participants are as concerned about the assumptions and data behind a productâs price as the price itself. Our valuation methods enable us to provide this level of transparency and disclosure. In addition, we employ a variety of reasonableness tests to ensure consistency and accuracy, while utilizing [FAS 157 Level II] observable market inputs where possible."
OTC Val is committed to working with vendors, fund administrators, custodians, and other sell-side and buy-side organizations to address growing market pressures for transparent and accurate valuations.